1 NON-DISCHAREABLE DEBTS – 11 U.S.C. §523 Despite granting of a discharge, (whether under §§727, 1141 etc.) certain debts may still be excepted from its effect and survive bankruptcy. Section 523 defines which debts are excepted from the discharge. Generally they fall into two categories: –Those requiring the commencement of an adversary proceeding. 11 U.S.C. §523(c). The non-dischargeability of these debts results from the debtor’s conduct. Bankruptcy is a proceeding in “equity” and as a matter of policy wrongful conduct will preclude equitable relief. He who seeks equity must do equity. –Those not requiring the commencement of an adversary proceeding which are dependent on the status of the debt.

2 UNSCHEDULED DEBTS – 11 U.S.C. §523(a)(3) If creditor is not scheduled in time to permit: –Timely filing of a claim (unless creditor had actual knowledge in time to file); and –If of a type non-dischargeable under §523(a)(2),(4), or (6), in time to request a determination of dischargeability (unless creditor had actual knowledge in time to file). No Asset Cases (see FRBP 2002(e)) –In re Madaj (Text pg. 145)

3 DOMESTIC SUPPORT OBLIGATIONS – 11 U.S.C. §523(a)(5) AND OTHER MARITAL DISSOLUTION DEBTS §523(a)(15) “Domestic Support Obligations” Are Not Dischargeable. –Domestic Support Obligations are defined at 11 U.S.C.§101(14A). Generally: in the nature of alimony, maintenance or support that is established by a separation agreement, divorce decree or property settlement agreement, a court order, or other determination of a governmental unit. –Consistent with long standing policy that dependent spouses and children should not be deprived of support by virtue of the discharge of the obligated spouse. Other debts incurred in connection with a divorce or separation. 11 U.S.C. §523(a)(15). –No hardship exception. Eliminated by the 2005 Act.

4 WILLFUL MALICIOUS INJURY TO PERSON OR PROPERTY – 11 U.S.C.§523(a)(6) Debts for willful malicious injury by the debtor to another entity or the property of another entity are excepted from discharge. §523(a)(6) What is the meaning of the term “willful malicious” ? –Kawaauhau v. Geiger (Text, pg. 160)

5 EDUCATIONAL LOANS – 11 U.S.C. §523 (a)(8). Educational loans are excepted from discharge. §523(a)(8). Policy: graduates have substantial earning potential, yet at the time of graduation possess few non-exempt assets. Absent this exception there is significant potential for abuse. Hardship Exception – Extremely difficult to prove. –In re Brightful (Text, pg. 166) Brunner test – Debtor must prove: –Debtor cannot maintain, based on current income and expenses a minimal standard of living for the debtor and dependents if forced to pay the loan –Debtor’s inability to maintain a minimal standard of living is likely to persist for a significant portion of the repayment period of the loan; and –Debtor made good faith efforts to repay the loan.

6 FRAUDULENTLY INCURRED DEBTS Debts obtained by false pretenses, a false representation or actual fraud are non-dischargeable. 11 U.S.C. §523(a)(2)(A) –What degree of reliance is necessary to render a claim non- dischargeable under this section Field v. Mans (Text pg. 174). –Justifiable reliance vs. reasonable reliance Debts for money, property, services or an extension, renewal or refinancing of credit are not dischargeable to the extent –(a) obtained by use of a “statement in writing” that is materially false, –(b) respecting the debtor’s or an insider’ financial condition; –(c) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and –(d) that the debtor caused to be made or published with the intent to deceive. 11 U.S.C. §523(a)(2)(B).

7 NON-DISCHARGEABLE DEBTS BASED ON CREDIT CARD FRAUD Can use of a credit card without intention to repay charges or use irrespective of ability to pay constitute fraud under §523(a)(2)(A). –Two views: One view, expressed in American Express Travel Related Services, Co. v. Hashemi (9 th Cir.) (Text pg. 187) –Intent inferred from the 12 factor test in Dougherty [Fn 1, page 188] Contra, In re Ellingsworth (Text Pg. 190). In this case even if the debtors misrepresented their intention to repay, the debt was dischargeable because the card issuer did not make an adequate inquiry into the debtor’s financial position and cannot be found to have justifiably relied on their representation to pay. –Congressional reaction to Ellingsworth 11 U.S.C.§523(a)(2)(C) was amended by the 2005 Act to presume non- dischargeable all consumer debts to a single creditor aggregating more than $500 (previously $1,225) incurred within 90 days (previously 60 days) of the petition date for luxury goods or services. –Cash advances of $750 (formerly $1,225) obtained within 70 days of the filing on open ended credit transactions (most credit cards).

8 FINES AND PENALTIES AS NON- DISCHARGEABLE CLAIMS With respect to distribution of property of the estate claims which are not in compensation of actual pecuniary loss are subordinated by virtue of 11 U.S.C. §726(a)(4). –Justification is not to have other creditors bear the burden of payment of the punitive claim. Rather should come from debtor’s pocket. Therefore, unless punitive claims are non-dischargeable chapter 7 would effectively defeat those claims –The question of the non-dischargeability of punitive claims was resolved by the Supreme Court in Cohen v. de la Cruz (1998) [Text pg. 192] Held: once it is established that the property was obtained by fraud, any claim arising there from – punitive and compensatory – is non-dischargeable. Does not affect allocation of distributions from the estate. Rather affects who can compete for future earnings. Fines, penalties or forfeitures payable in criminal proceedings are non- dischargeable. 11 U.S.C. §523(a)(7). –Restitution obligations are non-dischargeable. Kelly v. Robinson Compensation for actual pecuniary loss does not apply as goal is primarily punitive and victim’s loss is only an incidental result.

9 PROTECTING THE DISCHARGE 11 U.S.C. §§524(a)(1) and (2) protects the debtor’s discharge. –No longer an affirmative defense which can be waived. –New 524(i) provides that the willful failure on the part of a creditor to credit payments received under a confirmed plan is a violation of the injunction under 524(a)(2), but only if this failure caused material injury to the debtor. –New 524(j) provides mortgagees a safe harbor regarding default notices to a debtor post-discharge. If a court finds that a creditor’s position in objecting to the dischargeability of a debt was not substantially justified the court may award judgment for the debtor for among, other things attorneys’ fees and costs. §523(d). The discharge of §524 is solely for the benefit of the debtor not third parties. Section 524(e) limits the scope of the discharge. 11 U.S.C. §525 Protection Against Discriminatory Treatment –Governmental units cannot discriminate against debtors. §525(a) –No discrimination by private employers. §525(b). –No discrimination as to student loans. §525(c). (Added in 1994)